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Winged, but is Qantas terminal?

John Addis

Eventually, Qantas will get enough right to secure its future but it almost certainly won't do so under this management team. Photo: Michele Mossop

Make no mistake, the problems at Qantas have more to do with radically inept management than competition, cost structures and unionisation.

The question for investors is whether the plan to save $2 billion announced last Thursday makes Qantas a turnaround play. Members of the Qantas loyalty program face another issue; whether to spend their points now or hang on for better times.

Airlines are difficult businesses. Only a handful return their cost of capital over the long term, and they tend to be low-cost carriers such as Southwest and easyJet rather than legacy carriers such as Qantas. If you're investing in airlines, the deck is already stacked against you.

Good management may deliver reasonable returns for a while but as soon as the economy deteriorates, the share prices of even well-managed airlines plummet. The problem with Qantas is that the board has proved itself so poor that the case for making an investment is hard to justify at any price.

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In October 2011, in an attempt to win an industrial dispute, Alan Joyce grounded the airline, leaving passengers stranded. He correctly described it as an ''unbelievable decision''. The story made headlines worldwide and cost Qantas shareholders $70 million in cash and an untold fortune in goodwill.

The grounding also opened the door to a resurgent Virgin, which former Qantas employee and current Virgin chief executive John Borghetti took with relish. This was the beginning of the great Qantas decline, one then compounded by a huge error.

Joyce persisted with his predecessor's ''line in the sand'' approach. Qantas, he said, would not let its domestic market share drop below 65 per cent. The airline's now famous declaration that ''where Virgin puts on one aircraft we will put on two'' is a textbook definition of business irrationality, one that has consigned the airline to future losses that, by the time it is reversed, will have cost shareholders hundreds of millions of dollars.

Last Thursday, Joyce stressed the need to end unprofitable routes but failed to mention that this was what his strategy delivered.

The perplexing thought bubbles weren't mentioned, either. What happened to the ludicrous plan to set up an Asian business-only airline? How much has Jetstar Asia lost since it began operations? And does Qantas make anything from the traffic it has gifted to Emirates?

Few chief executives admit their errors, especially not those looking to dip their hand into the taxpayer's pocket. For the car companies, Coca Cola Amatil and Qantas, it's always someone else's fault. Shareholders are now being asked to back the architects of Qantas' demise with their new plan, with a bit of government support thrown in. It's a bit like being rear-ended by a dangerously incompetent motorist and then him asking you for a lift home.

Sir Humphrey Appleby of Yes, Minister might describe an investment in Qantas as ''courageous''. That's one way of putting it. There are 23 stocks on Intelligent Investor Share Advisor's current buy list. Each offers either a more secure or a potentially more lucrative return. Eventually, Qantas will get enough right to secure its future and capitalise on the strange, proprietorial affection many Australians have for it. But it almost certainly won't do so under this management team. It's a stock best avoided.

Now, what about those frequent flyer points?

The Qantas loyalty program is as wonderful a business as the airline is a poor one. Companies such as Woolworths and the banks pay for points from Qantas that are then offered as rewards to their loyal customers.

But these points aren't redeemed for years, and sometimes not at all. And when they are, it's for a seat on a flight that would probably be otherwise empty. So Qantas gets a high price for the points it sells but pays a very low one, sometimes many years later, when those points are redeemed. That makes the loyalty business exceptionally profitable, and explains how it boosted its pre-tax profit from $607 million to $662 million in the past six months. Unfortunately, that's bad news for your points.

With the rest of the airline struggling, Qantas will look to the loyalty arm to make even more money. One easy way of doing that is to slash the value of your points by increasing the amount you have to redeem for a flight. Service charges and limiting reward seats are other areas for Qantas to increase the already-incredible margins in its loyalty business. So it's going to get more expensive to redeem your points and harder to use them. Better spend them now and get what little value remains.

John Addis is a director of Intelligent Investor Share Advisor.

This article contains general investment advice only (under AFSL 282288).

For help finding profitable stocks that don't include Qantas, take out a 15-day free membership.

64 comments

Devaluing QFF points would be sure way to destroy customer loyalty!

Commenter

Loneliness of the long distance air traveller

Location

Sydney

Date and time

March 04, 2014, 1:33PM

+1 - i'm tempted to make my statement on qantas management ineptitude clear by taking my gold status to virgin. i hear they will do a swap...

Commenter

sarah

Date and time

March 04, 2014, 2:16PM

“Yet another example of upper class corporate welfare. Lets be real CEO's and executives are earning obscene salaries with the workers always told to exercise wage restraint with retrenchment being the final payoff. The fact that the Abbott Gov't is happy to provide tax concessions to the mining companies who are taking resources that belong to all Australians, provide funding to private schools taking much needed funding away from the Gov't schools to great disadvantage of young Australians not to mention the maternity allowance for wealthy mothers this is not about 'governing for all Australians' as Abbott promised. This is a government which has no plan for the future following in the footsteps of the Howard era where our future was squandered with no investment in education and the skills for a new economy..the lack of action under Howard is now apparent.

Qantas's biggest problem is its own ego.Why would a profitable airline run a strategy of "we will put on 2 extra planes for every new one that the opposition puts on".Purely an ego driven strategy, not a smart business move at all. Yes, market share is important, but not when you are running flights that are only 60% full.It is time for Joyce and his chief of strategy to go.

Commenter

Scotty16

Date and time

March 05, 2014, 7:52AM

And one of the management team during the demise of Ansett is running the domestic arm of Qantas. Is there an irony in there?

Commenter

Gary

Location

Mlebourne

Date and time

March 05, 2014, 10:01AM

Except that no money is diverted from the public education system to fund private schools as the students in private schools aren't using any resources from the public education system but parents putting their children through private schools are paying for public schools through he taxes they pay.

Government payments to private schools are returning some of this money paid by tax payers not using the public system.

But never let logic and truth stand in the way of a solid anti abbot/anti conservative govt rant.

Commenter

Really?

Location

There's always one...

Date and time

March 05, 2014, 10:03AM

What is this...Qantas? I assumed it has changed to a Chinese name already.

China owns all...obey now, scoundrels.

Commenter

China official

Location

Sydney

Date and time

March 04, 2014, 2:08PM

I for one welcome our new Chinese overlords

Commenter

All Hail

Location

The new Emperor

Date and time

March 05, 2014, 10:05AM

@All Hail...so do I, so do I...

Commenter

Facilitator of China

Location

Sydney

Date and time

March 05, 2014, 10:41AM

Take a look at their new buildings they recently refurbished at mascot , it cost millions , sorry there goes your loyalty points!